This is the ultimate sign that the world's 7th-largest economy has lost it

Brazil's
former President Lula da Silva at a news conference after a
meeting with Governor Pezao in Rio de Janeiro.Thomson Reuters

Brazil has lost it, and not because its economy is in the throes
of a recession.

Brazil has lost it because it seems as if everything it has known
about itself for the past 15 years is dead, and one recent event
has crystallized that confusion: the detention of former
President Luiz Inacio Lula da Silva.

Pro-Lula protesters gathered outside of his home and federal
police headquarters in Sao Paulo after his arrest. And why
not? Lula was the country's golden boy. The leader who got
along well with both the US and Venezuela's Hugo Chavez. The man
who brought millions out of poverty and embodied a modern Brazil
that had the potential to live up to its motto "order and
progress."

Operation Car Wash is an investigation into corruption at
Petrobras, Brazil's quasi-state-backed oil company.
Starting in March 2014, the investigation started to
conclude that Lula's ruling party used the company as its
own personal slush fund. (Think brief cases of cash exchanged,
kickbacks, luxurious international travel.)

The scandal had all the hallmarks of a third-world country
that, Brazilians (and many global investors) thought, Lula had
helped Brazil move past.

Brazilian
President Dilma Rousseff next to former President Luiz Inacio
Lula at a campaign rally in Sao Paulo.Thomson Reuters

'FORA!' (That means, 'OUT!')

Political chaos is the last thing Brazil needs during economic
hard times. Brazil's gross domestic product is expected to
contract 3.5% in 2016; inflation has hit almost 11%.

But political chaos is what Brazil has. Last weekend President
Dilma Rousseff (who belongs to Lula's Workers Party) had a nasty
shock when the head of her party and his wife admitted to taking
bribes.

"While authorities are still digesting this information,
this clearly brings the scandal substantially closer to the
President and Vice President," analysts at ACG Analytics wrote.
"The chances for impeachment or a determination by the Supreme
Electoral Court invalidating the results of the 2014 elections
are increased by this development."

That would be true chaos. What's more, the opposition isn't
in a great position either. Eduardo Cunha, the head of
Rousseff's opposition and leader of Brazil's lower
legislative house, started impeachment proceedings against the
president back in December.

The thing is, Cunha is also being investigated for
corruption associated with the Petrobras scandal.

With Lula's arrest, Rousseff is fighting for her life with her
allies as well. The PT wants to return to its values. It wants
Rousseff to forget belt tightening and budget cuts and use
stimulus to get the economy going again. As
Bloomberg points out, though, Rousseff's more market-friendly
allies in the legislature don't want that.

You can't please both those parties. In fact, in Brazil it may be
that you can't please anyone right now.